Vietnam is flouting a fundamental principle of the market economy by trying to keep weak banks alive, and not allowing them to go bankrupt will not help resolve the banking system's difficulties, economist Nguyen Tri Hieu tells Vietweek.

Vietweek: Banks around the world have recovered after the global financial crisis, but not in Vietnam. Why?

Nguyen Tri Hieu: Vietnam has not yet really integrated into the global economy. Shares of Vietnamese firms are not yet traded in the world market. So world events often affect Vietnam later than other countries. The global economy has bottomed and is now rebounding, but ours is still sluggish.

In fact, we should have overcome the difficulties 2-3 years ago, but we missed the chance. Vietnam's economy was in the worst situation when others started recovering in 2011-12. We should have drafted a plan for developing the real estate market, preventing the property bubble situation, when we launched the stimulus package in 2009. But we did not.

The government should have tightened the economy when the global financial crisis started in 2008. But it [failed to], keeping large amounts of money in circulation, which caused inflation of over 20 percent in 2011.

Thus, our finance is now still stagnant, while that of the world has started recovering from the crisis.

What are the reasons for the difficulties in the banking system?

Like many banks around the world, ours offered loans too easily and not managed the risks well. We should have tightened credit, especially to property projects to prevent a bubble situation and stabilize the market, but we did not do it. The property market surged in 2008 and 2009. Banks offered large loans to property projects, creating not only a property bubble but also a banking one. The price we have to pay now is high bad debt.

The government has not let any bank to go bankrupt, but has allowed some weak ones to merge to survive. But the restructure has yet to show any results. Do you think we should not stop weak banks from going bankrupt?

The merger was aimed at reviving weak banks. We should have let them go bankrupt. But the government is worried their bankruptcy would impact the entire banking system. So it has asked them to merge.

But the fact is it is difficult for two weak banks to become a strong one by merging. Even the merger between a strong bank and a weak one often reduces the former's health.

The government should have encouraged mergers between strong banks to create larger ones and improve the health of the banking system, instead of weak ones which are on the verge of the bankruptcy. The issue should be reviewed so that in future mergers can create stronger banks.

We have not let weak banks go bankrupt because of fears it could negatively affect the whole banking system. However, the elimination of weak firms is the first principle of the market economy. Only firms in good health can survive in the market economy. We have run counter to the principle of the market economy by trying to keep weak banks alive. If the situation persists, the banking system's difficulties will not be resolved.

There is an opinion that the government has not taken strong measures to restructure the banking system because of worries they could cause more problems to the fragile economy. What do you think about it?

All measures have side effects. The government worries that strong measures to reform the banking system could have unexpected side effects. For example, the bankruptcy of a weak bank could destroy people's belief, which could lead to the banking system's collapse.

The government is right to be concerned about the issue. However, authorities should prepare measures to minimize the side effects. We should not avoid these measures due to apprehensions about their side effects.

How do you see the future of local banks?

They will face more risks in the coming time since bad debts have not yet been thoroughly dealt with. The fact that the Vietnam Asset Management Company (VAMC) buys bad debts from banks is necessary, but not enough to resolve the problem of bad debts. The measure will only help remove bad debts from the balance sheets of banks and make them the VAMC's assets. But the fact is that the bad debts will still exist in the economy and become more serious.

There are two ways to deal with the situation. First, if debtors are likely to get back to health and repay their debts, the government should help them get bank loans to revive their business. Earlier, firms with bad debts were not allowed to borrow more from banks.

Second, we should accept the demise of debtors who are too weak and liquidate their assets to repay bank loans.